Investing in property has been considered a safe way to garner financial wealth in Australia for many years now.
Indeed, some 67% of Australians currently own their home, while almost 11% have a financial interest in at least one investment property.
For many homeowners and investors, these properties were bought in their own names.
However, in recent years there has been a rise in the trend of Aussies buying property through a company.
If you are not familiar with this practice, it is important to recognise there are some tangible benefits to doing this. However, there are also some drawbacks to this approach.
In this article, we will look at both sides of the coin, as we examine the pros and cons of buying a property through a company.
This will give you a firmer picture of whether it is an appropriate course of action for you.
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Pros and cons of a company investing in property
The practice of a company buying real estate is not a new phenomenon.
It may surprise you to learn that although they are best known for selling burgers, McDonald’s core business is actually buying and selling property.
In Australia, the ATO offers several tax breaks and inducements to incentivise individuals to buy an investment property. Most of which tend to be well-known in the public domain.
However, what is not so common knowledge is the benefits they offer companies who buy a property.
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These include the following:
1. Tax deductible
One of the major benefits of your company buying a property is that you can enjoy some attractive tax deductions.
By purchasing something through your business, you will be able to arrange both high mortgage and rental repayments.
This enables you to pay off the mortgage much more quickly. It also allows you to keep rent payments just below the required rate of mortgage repayments, which will allow you to facilitate negative gearing.
By doing this, you will be able to reduce the amount of income tax you will have to pay on account of your company structure.
2. Less capital gains tax
Whenever you buy or sell a property as an individual, any capital gain you make counts as taxable income. Therefore, you will need to pay capital gains tax on it.
As an individual, you are subject to a handful of discount exemptions. However, if buying as a company, there are several more open to you.
If the property is specifically used for business, the amount required to pay for capital gains tax reduces by 50%.
Additionally, if you keep the property for at least 15 years or are selling it due to permanent incapacitation or retirement, you may enjoy an exemption from paying capital gains tax at all.
3. Less tax when positive gearing
If you buy a property through a company that positively gears it, you will pay less tax than you otherwise would if you bought it as an individual.
Positively gearing a property refers to a situation when the rental return on it is higher than the amount required to make mortgage repayments.
In this circumstance, those who bought the property in their name will be required to pay up to 47% of the net income.
For a business that bought a property with a positive cash flow, this figure is much lower. Capping at a maximum of around 27.5%.
This could make a sizable difference to your overall earnings.
4. Distribute profits to save on tax
In some circumstances, buying a property through your business may enable you to distribute profits to family members or your partner, to lower the value of the tax payments you are required to make.
Several caveats and provisions that affect the degree to which you can do this. However, if you talk with your accountant, you might be able to devise an arrangement where you can share assets and high-income earnings with a family member who has a lower income.
This, in turn, puts you in a lower tax threshold, which results in you being required to pay less.
5. Limited liability
Another benefit to purchasing property on behalf of your company is that you will retain limited liability if your company starts to struggle financially.
Should your company run into debt, you will only be liable for the sum of money you personally invested.
This gives many investors terrific peace of mind, as they know that should anything not go to plan, creditors will not be able to touch their personal assets. Thus, ensuring their private home and investments stay separate from that of the company and remain completely safe.
As well as the benefits outlined above, there are also some things to be mindful of when purchasing property through a company.
1. Higher fees and rates
Unlike an individual, it is usually much more difficult to secure a loan in the name of a company.
When approaching a lender, you will typically be referred to a business banker. As a rule, they offer significantly higher fees and rates – even though, in real terms, there is no real difference between buying a property as an individual or through a company.
2. No tax discount when not used for business
As mentioned earlier, if the property is used for business activity, you could be eligible for a discount of 50% on capital gains tax, or even a complete exemption from the ATO.
However, if it is not, then you will be solely obliged to pay the full amount of it. This could end up being a substantial figure, which could impact the attractiveness of your investment.
For instance, if your property made a $500k profit when sold, you would be required to pay capital gains tax on the whole of that amount.
With the discount applied for business use, you would only need to pay $250k.
3. Higher costs of tax returns
Unfortunately, when buying a property on behalf of your business, you will be subjected to higher costs in terms of company tax returns as compared to personal ones.
Throughout the year, should you spend any money accrued from the profits your property makes, you will be required to pay tax on the dividends.
This might seem nominal, but it does add up over 12 months, so it is something you should be mindful of come tax time when it comes to your earnings assessment.
More on buying a property through a company
Considering the Name of the Company
When it comes to buying property through a limited company, the company name plays a vital role. Ensuring that the company name reflects the nature of the investment can aid in establishing a strong brand identity.
Understanding the Role of Brokers
A mortgage broker, like Soho Home Loans, can be invaluable when you’re looking to purchase a property through your company.
They can guide you on the nuances of securing a loan in a company name as opposed to borrowing in an individual’s name. The intricacies of borrowing as a company can be different from buying as an individual.
Navigating Taxation Challenges
One of the main challenges of owning property through a company is understanding the tax implications.
While there are tax incentives for purchasing residential property as an individual, buying property through a limited company brings its own set of benefits and challenges.
These include possible advantages related to CGT (Capital Gains Tax) discounts, known as cgt discount, and potential drawbacks related to inheritance tax and corporation tax on your profits.
The Importance of Agreements
When buying property in a joint venture or with a partner, it’s crucial to have an agreement in place. This ensures clarity about the ownership of the property and roles of the company directors.
An understanding between directors of the company can prevent potential conflicts in the future.
Pondering on Trust Structures
For those who are torn between setting up a company or a trust for purchasing property, it’s essential to understand the benefits of each.
Trust structures can offer a different level of flexibility and protection compared to companies, especially when dealing with negatively geared properties. Consulting with experts or seeking advice from your accountant can provide clarity.
Stamp Duty and Other Costs
While many focus on tax rate and benefits, one shouldn’t forget other associated costs, such as stamp duty. This can vary depending on whether the property is negatively geared or if the asset has been held for an extended period.
If you have been thinking of purchasing a property through a company, we hope you have found this list of pros and cons very informative.
How do different roles and responsibilities stack up in a corporation? Discover the full details in our company strata article.
There is no doubt there are some major benefits in doing this. But like with most investments there is an element of risk involved.
Before making any major commitments, it is worth seeking professional advice from a fully qualified accountant who specialises in business accountancy. They will be able to provide further details on all the aspects outlined above to help you decide the best course of action for you.
At the end of the day, the success of a company buying a property is dependent on whether you run a business out of it. If this is something you intend to do, you’ll then need to plan everything from payment solutions such as Smartpay, to strategies for growth, legal considerations, and more.